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Perspectives from Above the Noise -- Week of January 15th, 2018

Perspectives from Above the Noise -- Week of January 15th, 2018

January 16, 2018

U.S. equity momentum accelerated to new heights entering 2018, with the S&P 500 posting new record-setting highs during eight of the first nine trading days of the year. Quite significantly, the S&P 500 broke its 200-day trend line average by over 11% - a velocity not seen since 2013, which was the best year for stocks in a generation. Statistically, that level of accelerating velocity ranks in the 92nd percentile of momentum going back 20 years. According to S&P Dow Jones Indices, 47 companies within the S&P 500 are already up at least 10%, while just two are down as much. While equities have been underpinned by the global economic recovery and strengthening labor markets, the degree of corporate earnings growth will be revealed in the coming weeks as the fourth quarter earnings season got underway on Friday. Expectations are high, with analysts’ forecasting overall S&P 500 company earnings may rise 10.6% in the fourth quarter year-over-year, according to S&P Capital IQ.

For the week, the S&P 500 returned +1.44%, the Dow Industrials advanced +2.00%, and the MSCI EAFE (developed international) gained +1.20%.

What We’re Reading

Gold Hits 4-Month High -- Fox Business

France to Become Start Up Nation? -- Reuters

Chart of the Week: High Yield Spread at Lowest Since July 2007

The chart illustrates that the spread between the yield on non-investment grade high yield bonds and U.S. Treasuries fell to 3.33% last week, which is the narrowest since July 2007. The average spread over the last 15 years is 5.64%. The spread between high yield bonds and U.S. Treasury yields is a proxy for how investors feel about risk in credit markets. If the difference between the two yields is wide, there is a high perceived risk in credit markets for which investors demand a higher risk premium and if the spread is narrow, the perceived risks are low.

Spreads have been trending lower since they reached 8.87% in February 2016, a period when there was heightened apprehension about the global economy slipping into a recession. Crude oil prices had then dropped below $30/barrel, causing concern about default risk in energy company bonds. As global growth has since accelerated, today’s high yield spreads are at their lowest level of the current expansion. The narrow spread is signaling a low probability of high yield bond default. This is a positive sign for risk assets. However, if the high yield spreads begin to increase in a material way, caution may be warranted for risk assets.

Some materials are chosen by the Cetera Investment Management team and summarized by Jason Vitucci who is not affiliated or registered with Cetera. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Cetera Investment Management individuals who provide investment management services are not associated persons with any broker-dealer. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.